Funding Tips: Things Investors Want in Your Startup
There are myriad business ideas, and you may have one of them. But without the right investments in your idea, it will not come to fruition. This is where investors come into play, who are looking for opportunities to generate larger and faster returns on their money than if they invested it in the stock market.
Different Investor Types for the Startup
For entrepreneurs and business leaders seeking capital, it is important for you to understand the different types of investors. Of course, beyond individuals and entities providing you with investment dollars, banks and government agencies are also good sources to explore. In the case of the government, there may be programs and agencies that will provide grants for certain types of projects. While the monies here do not translate into equity, they do impact profitability and revenue. This can be important when raising money from investors.
Friends and family
The initial type of investor in most startups are friends and family. These are people who already know and trust you. The amount of investment from friends and family can vary—from a few hundred dollars to six figures.
Professional angel investors are individuals seeking opportunities where they can generate significant returns on a new idea or business opportunity. These individuals can be approached directly online and pitched at different events (many of which are now virtual due to the pandemic). They also are part of an investment network and can introduce you to other angel investors who may be interested in your business.
Angel investors are increasingly banding together to make investments in startups. Business plans and market opportunities are reviewed by the group, which reduces risk while bolstering confidence in the business being funded. For startups, it gives you a chance to vie for larger check sizes.
Accelerators and incubators
These groups provide strategic business advice and direction and often provide anywhere between $10,000 and $120,000 in seed money. This gives you the ability to cultivate your idea and gain traction with the underlying support of the bigger group of investment professionals. Typically, at this stage you can tune your idea, business plan, and go-to-market strategy and prepare to take your business to the next level of funding. For those fortunate enough to be accepted into an accelerator or incubator, the expectation is that you must be agile and get your business ready for the next stage quickly.
Venture capital firms
For most startups, the ultimate track is to secure funding from venture capital (VC) firms. These offer the largest checks of investor types and provide the power and prestige to fuel your business to grow revenue and market share. When seeking out funding from a VC, you need to be aware of their areas of specialization, location, timeline of funds, and connections with potential customers. A good place to start is with their current and former roster of businesses they are funding or have funded.
Big corporations like to invest in startups because doing so carries a variety of benefits. Some of the biggest ones include the ability to supplement their growth numbers, diversify assets, and identify talent and technology to expand into new markets and tackle industry changes. Some even are launching their own accelerator and incubator programs to nurture these opportunities.
An area that has grown in popularity in recent years is crowdfunding. In these scenarios, startups seek the backing of multiple individuals that may not have any attachment to each other. Funds are often raised online and word of mouth is used to solicit more and more investors to startup. These groups of investors are given the opportunity to review and vet the startup’s business plan and normally receive some form of equity in the company in exchange for funding support.
Things You Need to Do to Attract Investors
Now that you know the different sources of investment that you can seek, it is time to understand what investors want to see in a startup before investing in it.
Investors want to see a solid and compelling business plan. They want to ensure that the startups leadership team is realistic and has a tenable, long-term vision. Your business plan needs to include financial projections, go-to-market strategy and activities, and detailed marketing plans. For those needing help getting started, HubSpot has a free business plan template.
For startups with a viable product or service that can be sold told, investors want to see market momentum—growing revenue and more users. For startups that have a product or service still in development, investors want to see a roadmap for achieving a minimum viable product (MVP). At the same time, customer business value must be demonstrable. Investors want to see customers using your product or service and getting value from it. You need to address issues such as your overall idea, your targeted customers, who are the end users, why customers and end users want your product or service, and why you are building the solution and business.
Market size will determine which investors are interested in funding your startup and which ones will pass. VCs, for example, only fund startups with the potential to generate large returns. Thus, startups with a small market size will not garner any interest from VC investors. For startups with large markets that require significant capitalization, small investors simply cannot provide sufficient funds to grow the business. Obviously, the larger a market size, the greater the interest investors will show in your company.
Every business must differentiate itself from other businesses. We already have an Apple, Microsoft, and Jamba Juice. Your startup must be distinctly different and do something that sets you apart from other businesses. This can mean different things depending on the nature and location of a business. For a retailer, it might be that the closest competitor is miles away. For a professional services firm, it might be lower pricing or a unique customer experience.
Investors hear myriad pitches every year—and many of them might be great ideas. They want more than a great pitch deck; they want to see that you have significant momentum. It might be that you are building a product with bootstrapped resources, signing up early customers, hiring top talent, or targeting customers in a unique manner. These all point to the fact that you’re committed to your idea and willing to remove boulders when you encounter them.
Putting together a team that can succeed and overcome adversity isn’t easy. A critical starting point is a team that is cohesive and works together well. Not all professionals gel and collaborate effectively. Investors employ a long list of characteristics they seek in winning teams, including experience, competency, commitment, ingenuity, trustworthiness, coachability, resiliency, and transparency. These need to come across in your interactions—virtual and in-person.
Investors want a solid return on their investment, and you must have a firm exit strategy in place. For some investors, they are willing to wait for their returns over an extended period of time. But for many, they want to see an exit strategy in a few years that ends with an event—acquisition, sale of shares to principals, IPO, etc. You must be able to demonstrate to investors what their return will look like with financial model with assumptions backed by data, capital budgeting techniques, various ROI calculations, cash sources, among others.
When meeting with investors, startup founders need to exude professionalism. Meeting in a hotel conference room or worse the local coffee shop simply will not do. Even if you have an office, it very likely isn’t the best location for a professional meeting—one where first impressions count. Rented meeting room space, such as Davinci Meeting Rooms, is a great option for these critical face-to-face meetings. Lobby greeters, a highly desired business location, administrative support, and aids and tools that make it easy to facilitate a great meeting experience.
Reasons Startups Fail
There are a lot of reasons why startups fail. Ironically, at the very top of the list is no market need. Ideas and investments only count if there is a market to purchase the products or services. The next reason on the list is run out of cash. Sometimes, startups have many of the above attributes, but they simply don’t have enough monetary reserves in the bank to get them over the hump. In these instances, it is important for business starts to know what investors seek in investments—and to highlight those when in conversations with them.